How likely is a BHP-Anglo merger now?

BHP has received the first signs of positive engagement on its proposed £38.6bn takeover of Anglo American, after the two sides agreed on Wednesday to a week’s extension of talks over what would be the mining sector’s largest-ever deal.

Hopes of an agreement were kept alive even as Anglo rejected a third and what BHP dubbed “final” offer that valued it at £31.11 per share, up from about £25 in its initial approach.

But the proposal kept a controversial structure that demands Anglo demerges its South African platinum and iron ore units.

Can the mining mega-combination still go ahead and, if so, how can the differences between them be reconciled by 5pm next Wednesday?

Why has Anglo agreed to extend for seven days?

What was missing from Anglo’s latest rejection was as telling as what was included. This time around, the UK-listed group no longer said that BHP’s offer “significantly undervalued” it.

Analysts had highlighted the £30-£35 per share range as a magic number to bring Anglo to the table, a level BHP has now reached.

Anglo did, however, highlight “serious concerns” in its rejection of the third proposal over the risks placed on its own shareholders to execute two spin-offs as a condition of the deal going ahead.

In its view, the proposal’s unconventional structuring is inextricably linked to the value that needs paying — BHP must alter the structure or pay more than it otherwise would if it were acquiring the whole company.

What will the two companies be negotiating?

BHP and Anglo will be wrangling principally over the deal structure, which Anglo argued is “unprecedented” in demanding it clean itself up before being bought.

From Anglo’s perspective, BHP is underestimating the costs, time and risks involved in simultaneously changing ownership and demerging two South African units — requiring co-operation of four boards and negotiations with government authorities.

Anglo will hope to convince BHP on the quantum of costs and risks that come with its proposal. The Australian mining giant will be putting forward its own assumptions on why it believes its plan is simpler, to which Anglo’s retort will be: “Why not buy us whole and do it yourself then?”

The FTSE 100 group has unveiled its own drastic restructuring since BHP’s first approach, under which Anglo would be rationalised into three divisions: copper, iron ore and fertiliser. It would shed long-held mines producing platinum metals, metallurgical coal and nickel, as well as its trophy diamond brand De Beers, through sales and spin offs.

A change of control under the BHP deal would allow South Africa’s competition authorities and government departments to impose costly measures such as black-empowerment conditions, headcount freezes and local spending requirements, according to a person close to Anglo.

Other recent deals such as Vitol buying Engen’s gas stations in South Africa took over 400 days to hammer out with the authorities, and such deals — for companies less celebrated in South Africa than Anglo — added roughly 5 to 10 per cent to costs above the acquisition price.

The other sticking point will be the value of Anglo’s prized copper mines given volatile commodity prices. Vital for electrifying the global economy and with severe shortages predicted later this decade, copper rallied to an all-time high above $11,000 per tonne this week before snapping back to $10,300 per tonne, pushing shares of copper producers higher.

Is this BHP’s final offer?

BHP called their latest proposed all-share takeover “final” — yet the fine print had some hefty caveats that prompted investors and bankers to predict that it may not be the last.

The offer could be increased if a fresh interloper such as Glencore enters the scene or the Anglo board recommends a better offer.

Abel Martins-Alexandre, head of infrastructure, energy and industrials at Lloyds Banking Group, noted on LinkedIn that “M&A 101” is that “a final and best offer is not final”.

Ultimately, Anglo wants BHP to amend the structure to take on more of the risks — or to recognise the risks and cough up more. That could range from buying the whole company to taking on Kumba Iron Ore, one of the South African units, or putting creative structures in place, such as payouts based on commodity prices.

However, BHP does not intend to improve the share offer or alter the structure of the deal, according to people familiar with the matter.

“On balance, we believe the most likely outcome is that the BHP bid fails,” said Richard Hatch, analyst at Berenberg. “But it is on a knife edge.”

Australian shareholders of BHP are split on their level of comfort around another improved offer. Matthew Haupt of Wilson Asset Management said he was concerned there could be another bump. But Ben Cleary at Tribeca Investment Partners, which has a bigger holding in Anglo than BHP, said: “I don’t think they get too much mud thrown at them for one more increase”.

For the miners’ chief executives, even more is at stake. One fund manager with deep knowledge of the mining industry said that BHP CEO Mike Henry’s job hinges on getting a deal done.

How likely is a deal?

The tide has swung towards a deal being far more likely than it looked just two days ago. BHP’s shares dropped almost 3 per cent on Wednesday, while Anglo’s largely held on to their 25 per cent gains of the past month, indicating a higher likelihood of the combination happening.

Dominic O’Kane, JPMorgan analyst, said an agreed deal now had a “materially higher probability” as BHP was offering a change-of-control premium for the first time and had flexibility to “sweeten further”.

For some Anglo shareholders, the increased offer was sufficient to get them to declare their support for a deal going ahead.

“We think an agreed deal would be a good outcome,” said Dawid Heyl, portfolio manager at Ninety One, which owns 2.1 per cent of Anglo. “It looks like it could be heading that way, given this extension.”

South Africa’s state-owned Public Investment Corporation, Anglo’s second-biggest shareholder, broke its silence on Wednesday, hours before BHP and Anglo announced the extension. It demanded a “meaningful revision” to BHP’s offer, highlighting “material risks” associated with the proposed transaction, but said it was willing to engage with BHP for the first time.

Even if an offer is agreed, then it might still be far from a done deal for BHP. Chris LaFemina, analyst at Jefferies, said that even if an offer were recommended by the Anglo board, with some revision to the merger ratio, deal structure or both, then the question would become “who else may step in as an interloper”.

“Watch this space,” he said, suggesting Glencore as the most likely rival bidder. For now, Glencore has kept quiet on the sidelines of this takeover battle. But LaFemina cautions: “This is not over yet.”

With additional reporting by Harriet Agnew in London

A volatile month in Anglo’s 107-year history

april 24

News reveals BHP made a £31bn all-share offer for Anglo American, sparking fury from South Africa and Anglo’s shareholders. The proposal is promptly rejected with Anglo saying it “significantly undervalues” the business.

May 7

BHP increases its offer to £34bn. The new offer kept a provision requiring Anglo to spin off its two Johannesburg-listed businesses — Kumba Iron Ore and Anglo American Platinum — which had angered South African politicians. Again, days later, the bid is rejected using the same language.

May 14

Anglo presents a plan to reinvigorate itself. It proposes splitting into three divisions; copper, iron ore and fertiliser — shedding platinum, metallurgical coal and nickel mines as well as diamond brand De Beers.

May 22

South Africa’s state-owned Public Investment Corporation, the second-largest shareholder of Anglo American, calls for a “meaningful revision” to BHP’s offer. Anglo rejects a third and “final” offer from BHP that values it at £38.6bn, saying it has “serious concerns” about the structure but says it will continue to engage with BHP.

May 29

Date set for the new deadline by which BHP will have make a formal bid, or walk away.